Posts Tagged Actio Pauliana
I called Bobek AG’s Opinion in C-337/17 ‘solid’ – by which I also implied: convincing. Is the actio pauliana by a Polish company against a Spanish company, which had bought immovable property from the former’s contracting party, one relating to ‘contract’ within the meaning of Article 7(1) Brussels I Recast?
Bobek AG Opined it is not. The CJEU today held it is. I disagree.
Firstly, the second chamber, at 29 ff, repeats the inaccurate references in Valach and Tunkers, that (at 30) ‘actions which fall outside the scope of [the Insolvency Regulation] fall within the scope of [Brussels I Recast].’ This oft repeated quote suggest dovetailing between the two Regulations, a view which is patently incorrect: readers can use the tag ‘dovetail’ or ‘arrangement’ (for ‘scheme of arrangement’) for my view on same; see e.g. Agrokor.
Having held (this was not seriously in doubt) that Brussels I Recast is engaged, the Court then takes a much wider view of the Handte formula than advocated by Bobek AG. The Court at 37 refers to Granarolo, merely in fact to emphasise the requirement of strict interpretation of the jurisdictional rules which vary Article 4’s actor sequitur forum rei’s rule. At 43 follows the core of its reasoning: ‘By [the pauliana] the creditor seeks a declaration that the transfer of assets by the debtor to a third party has caused detriment to the creditor’s rights deriving from the binding nature of the contract and which correspond with the obligations freely consented to by the debtor. The cause of this action therefore lies essentially in the breach of these obligations towards the creditor to which the debtor agreed.’
The Court does not refer to Ergo, let alone to Sharpston AG’s ‘centre of gravity’ test in same, however it would seem that this may have influenced it. Yet in my view this is way too extensive a stretch of the Handte or Sharpston AG’s Ergo formula. Litigation in the pauliana pitches the creditor against the third party. It would take really quite specific circumstances for Handte to be met in the relation between these two. That a contractual relation features somewhere in the factual matrix is almost always true.
For a comparative benchmark, reference can be made to Refcomp where the Court took a very limiting view on subrogration of choice of court.
The Court’s formulation at 45 is entirely circular: were the creditor not able to sue in the forum contractus, ‘the creditor would be forced to bring proceedings before the court of the place where the defendant is domiciled, that forum, as prescribed by Article 4(1) of Regulation No 1215/2012, possibly having no link to the place of performance of the obligations of the debtor with regard to his creditor.’ Indeed: because the pauliana does not mordicus have to links to that place; it is not because it might not, that a forum contractus has to be conjured up to secure these links.
The Court then quite forcefully and seemingly without much hesitation identifies a specific forum contractus (unlike the AG who had suggested that that very difficulty supports his view that there simply is no forum contractus to speak of): at 46: ‘the action brought by the creditor aims to preserve its interests in the performance of the obligations derived from the contract concerning construction works, it follows that ‘the place of performance of the obligation in question’ is, according to Article 7(1)(b) of this regulation, the place where, under the contract, the construction services were provided, namely Poland.’
The initial contractual obligation between creditor and debtor therefore creates crucial jurisdictional consequences vis-a-vis third parties whose appearance in the factual matrix presents itself only very downstream. That, I would suggest, does not at all serve the predictability which the Chamber (rightly) emphasises at the very outset of its judgment as being the driving principle behind its interpretation.
I am not convinced by this judgment. (And yes, I am being polite).
Feniks: Bobek AG rejects forum contractus for Actio Pauliana and defends predictability of the Brussels regime.
Is the actio pauliana by a Polish company against a Spanish company, which had bought immovable property from the former’s contracting party, one relating to ‘contract’ within the meaning of Article 7(1) Brussels I Recast?
Bobek AG Opined in C-337/17 Feniks v Azteca on 21 June. His Opinion features among others a legal history class on the action pauliana, and eventually a justifiable conclusion: the action is not one in contract. In C-115/88 Reichert I the Court held that the French civil law actio pauliana does not fall within exclusive jurisdiction concerning rights in rem in immovable property (Article 24(1). Soon afterwards, the Court added in C-261/90 Reichert II that the same actio pauliana was neither a provisional measure nor an action bringing proceedings concerned with the enforcement of a judgment. It was also not a matter relating to tort, delict or quasi-delict.
That left only the potential for a forum contractus to be decided.
The AG reviews a number of arguments to come to his decision. One of those I find particularly convincing: at 62: assuming that the applicability of the head of jurisdiction for matters relating to a contract were to be contemplated, the question that immediately arises is which of the two contracts potentially involved should be taken as relevant? To which of the two contracts would an actio pauliana in fact relate? Among others (at 69-70) Sharpston AG’s Opinion in Ergo is discussed in this respect and the AG in my view is right when he dismisses the contractual relations at issue as an anchor point.
At 69 the AG also adds a knock-out point which could logically have come at the very beginning of the Opinion:
‘it should also be added and underlined that both approaches outlined above fail to satisfy the requirement of ‘obligation freely assumed by one party towards another’, [the AG refers to Handte, GAVC] that is by the Defendant towards the Applicant. Even if the case-law of this Court does not require that there is identity between the parties to the proceeding and to the respective contract, it appears difficult to consider that the mere filing of an actio pauliana creates a substantive-law relationship between the Applicant and the Defendant resulting from, for example, some kind of legal subrogation founded by an act of COLISEUM (as the Applicant’s initial debtor).’
Readers further may want to take note of para 92: the AG’s view to treat the power of recitals with caution. The AG ends at 97-98 with a robust defence of the Brussels regime, with specific reference to the common law (footnotes omitted):
‘What has to be sought is a principled answer that applies largely independently of the factual elements in an individual case. While fully acknowledging and commending the attractive flexibility of rules such as forum(non) conveniens that allow for derogation in the light of the facts of a specific case, the fact remains that the structure and the logic of the Brussels Convention and Regulations is indeed built on different premises. What is understandably needed in a diverse legal space composed of 28 legal orders are ex ante reasonably foreseeable, and thus perhaps somewhat inflexible rules at times, and less of an ex post facto explanation (mostly as to why one declared oneself competent) heavily dependent on a range of factual elements.
All in all, in the current state of EU law, actio pauliana seems to be one of the rare examples that only allows for the applicability of the general rule and an equally rare confirmation of the fact that ‘… there is no obvious foundation for the idea that there should always or even often be an alternative to the courts of the defendant’s domicile’. ‘
A solid opinion with extra reading for the summer season (on the Pauliana).
Charles Oellermann has excellent analysis of Spizz v. Goldfarb Seligman & Co. (In re Ampal-Am. Israel Corp. 562 B.R. 601 (Bankr. S.D.N.Y. 2017). The U.S. Bankruptcy Court for the Southern District of New York ruled that the avoidance provisions of the Bankruptcy Code do not apply outside the U.S. because, on the basis of the language and context of the provisions, Congress did not intend for them to apply extraterritorially. In so holding, it applied the Morrison test which was central to the United States’ Supreme Court ruling in Kiobel, which of course has been the subject of repeated analysis on this blog.
Whether an avoidance action (which in civil law jurisdictions would be tackled by an actio pauliana) is extraterritorial in and of itself, is not easily ascertained. In his review, Charles has superb overview of case-law applying a centre of gravity test: depending on the facts of the case, parties’ action does or does not take place outside the US in relation to the parties’ domicile, the subject of the transaction, etc. He also rightfully highlights that courts are aware that even if one were to apply the provisions extraterritorially, a US judgment might not be easily enforced against foreign debtors.
Case-law is evidently not settled and one imagines that the extraterritoriality of bankruptcy laws will in some form further end up at the USSC.
Vinyls Italia: Szpunar AG on the chemistry between the Insolvency Regulation and Rome I. And again, on the pauliana.
In C-54/16 Vinyls Italia (in full: Vinyls Italia SpA, in liquidation v Mediterranea di Navigazione SpA) Szpunar AG opined last week (the Opinion is not available in English). At the core of the case is the application of Article 13 of the Insolvency Regulation 2000 (Article 16 in the 2015 version; see my general review here), however the case opens an interesting discussion on the meaning of ‘international’ in ‘private international law’.
For the general context of Article 13 (16 new) I should like to refer to my review of Lutz and Nike. At issue in the case at hand are payments made by Vinyls to Mediterranea for the transport of chemicals of the former by the latter. Both are Italian registered companies. Shipment was presumably carried out in Italy (an extra-Italian element in the actual transport does not feature in the factual analysis re ‘international’, which I refer to below). However the contract made choice of law in favour of English law. Mediterranea makes recourse to Article 13 juncto English law as the lex contractus to ward off an attempt by Vinyls to have the payments return to its books.
First up is the question whether courts should apply Article 13 ex officio: for Mediterranea’s claim was made after the procedural deadline foreseen by Italian law. Szpunar AG in my view justifiably suggest it does not: he refers to the Virgos Schmit report [„Article 13 represents a defence against the application of the law of the State of the opening, which must be pursued by the interested party, who must claim it” – § 136 of that report, para 43 of the AG’s Opinion) and to the CJEU’s finding in C-310/14 Nike at 26. The AG does point to the particulars of the case: Mediterranea seemingly had provided proof supporting its view that the substantial conditions of Article 13 had been met (in particular an expert opinion by an English lawyer) but had not expressis verbis requested its application. Szpunar refers the final say to the Italian court, which needs to judge on the basis of Italian civil procedure however does suggest that it seems fairly inconceivable to have provided proof for the fulfillment of a legal proviso, without meaning to request its application.
The question on the applicability of Rome I at all (which is required if Mediterranea want to make recourse to the provisions of English law as lex contractus per Rome I or the Rome convention) may not make it to the CJEU. As Szpunar AG notes, the underlying contract dates prior to 17 December 2009, which is the cut-off date of the Rome I Regulation. The referring court being a court of first instance, it is not in a position to request preliminary review of Rome I’s predecessor, the 1980 Rome Convention. The AG completes the analysis anyway (the Court itself will not, should it find Rome I not to be applicable) and takes in my view the right, expansionist approach (one which I also defend in my handbook): especially given the presence of Article 3(3)’s proviso for ‘purely domestic’ contracts, it is clear that it suffices for Rome I to be applicable that parties make choice of court in favour of a foreign law. Further in the opinion (137 ff) he also suggests that such application is not tantamount to fraude a la loi (fraus legis) and again I agree: the relevance of fraus has been seriously diminished by the provisions on party autonomy in both Rome I and the Rome Convention.
The use of choice of law per Rome I (or the Convention) in turn serves as a jack to trigger the application of the insolvency Regulation. That too is correct in my view, and with undramatic consequences. Choice of law for the underlying contract only identifies its lex causae (where relevant, with an impact on Article 13 of the Insolvency Regulation). It does does not of course in and of itself determine the lex concursus: the latter is determined by the Insolvency Regulation once /if insolvency occurs. Parties have no means to manipulate this at the time of the formation of the contract.
Exciting, conceptual stuff. Most probably the Court itself will not be in a position to assess it all.
(Handbook of) EU Private International Law, 2nd ed. 2016, Chapter 3, Heading 3.2.1; Heading 22.214.171.124; chapter 5; Heading 5.7.1.
Not quite HoHoHo (yet): OOO PROMNEFTSTROY v Yukos: Insolvency and conflict of laws in the Dutch Supreme Court.
Granted, the (bad) pun in the title would have worked better around the end of year, which is when I had originally planned this posting, before I got sidetracked. Bob Wessels has excellent overview here (including admirably swift and exact translation of core parts of the judgment). OOO PROMNEFTSTROY v Yukos at the Dutch Supreme Court is but one instalment in running litigation literally taking place across the globe.
Of particular interest to the blog is the court’s finding (at 3.4.2) that the existence of a corporation is subject to the lex incorporationis not, as the Court of Appeal had held, the lex concursus in the event of insolvency. The EU’s Insolvency Regulation does not apply for COMI is not within the EU. The Insolvency Regulation does not in so many words say the same as the Dutch Supreme Court however it is likely that under the EIR, too, this issue falls under lex societatis /lex incorporationis (see e.g. Miguel Virgos & Francisco Garcimartin, The European Insolvency Regulation: Law and Practice, Kluwer, 2004, p.82 (par 123, f: dissolution of the company).
One can imagine of course the one or two complications arising out of the seizure of assets of a company which no longer exists.
European private international law, second ed. 2016, Chapter 5, Heading 5.7
Postscript for an example of where Article 4(2)m, lex fori concursus for rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors, applies without correction, see C-594/14 Kornhaas.
In my posting on Lutz I flagged the increasing relevance of Article 13 of the Insolvency Regulation. This Article neutralises the lex concursus in favour of the lex causae governing the act between a person (often a company) benefiting from an act detrimental to all the creditors, and the insolvent company. Classic example is a payment made by the insolvent company to one particular creditor. Evidently this is detrimental to the other creditors, who are confronted with reduced means against which they can exercise their rights. Article 13 reads
Detrimental acts. Article 4(2)(m) shall not apply where the person who benefited from an act detrimental to all the creditors provides proof that: – the said act is subject to the law of a Member State other than that of the State of the opening of proceedings, and – that law does not allow any means of challenging that act in the relevant case.
In the case at issue, C-310/14, Nike (incorporated in The Netherlands) had a franchise agreement with Sportland Oy, a Finnish company. This agreement is governed by Dutch law (through choice of law). Sportland paid for a number of Nike deliveries. Payments went ahead a few months before and after the opening of the insolvency proceedings. Sportland’s liquidator attempts to have the payments annulled, and to have Nike reimburse.
Under Finnish law, para 10 of the Law on recovery of assets provides that the payment of a debt within three months of the prescribed date may be challenged if it is paid with an unusual means of payment, is paid prematurely, or in an amount which, in view of the amount of the debtor’s estate, may be regarded as significant. Under Netherlands law, according to Article 47 of the Law on insolvency (Faillissementswet), the payment of an outstanding debt may be challenged only if it is proven that when the recipient received the payment he was aware that the application for insolvency proceedings had already been lodged or that the payment was agreed between the creditor and the debtor in order to give priority to that creditor to the detriment of the other creditors.
Nike first of all argued, unsuccessfully in the Finnish courts, that the payment was not ‘unusual’. The Finnish courts essentially held that under relevant Finnish law, the payment was unusual among others because the amount paid was quite high in relation to the overall assets of the company. Nike argues in subsidiary order that Dutch law, the lex causae of the franchise agreement, should be applied. Attention then focussed (and the CJEU held on) the burden of proof under Article 13, as well as the exact meaning of ‘that law does not allow any means of challenging that act in the relevant case.‘
Firstly, the Finnish version of the Regulation seemingly does not include wording identical or similar to ‘in the relevant case‘ (Article 13 in fine). Insisting on a restrictive interpretation of Article 13, which it had also held in Lutz, the CJEU held that all the circumstances of the cases need to be taken into account. The person profiting from the action cannot solely rely ‘in a purely abstract manner, on the unchallengeable character of the act at issue on the basis of a provision of the lex causae‘ (at 21).
Related to this issue the referring court had actually quoted the Virgos Schmit report, which reads in relevant part (at 137) ‘By “any means” it is understood that the act must not be capable of being challenged using either rules on insolvency or general rules of the national law applicable to the act’. This interpretation evidently reduces the comfort zone for the party who benefitted from the act. It widens the search area, so to speak. It was suggested, for instance, that Dutch law in general includes a prohibition of abuse of rights, which is wider than the limited circumstances of the Faillissementswet, referred to above.
The CJEU surprisingly does not quote the report however it does come to a similar conclusion: at 36: ‘the expression ‘does not allow any means of challenging that act …’ applies, in addition to the insolvency rules of the lex causae, to the general provisions and principles of that law, taken as a whole.’
Attention then shifted to the burden of proof: which party is required to plead that the circumstances for application of a provision of the lex causae leading to voidness, voidability or unenforceability of the act, do not exist? The CJEU held on the basis of Article 13’s wording and overall objectives that it is for the defendant in an action relating to the voidness, voidability or unenforceability of an act to provide proof, on the basis of the lex causae, that the act cannot be challenged. Tthe defendant has to prove both the facts from which the conclusion can be drawn that the act is unchallengeable and the absence of any evidence that would militate against that conclusion (at 25).
However, (at 27) ‘although Article 13 of the regulation expressly governs where the burden of proof lies, it does not contain any provisions on more specific procedural aspects. For instance, that article does not set out, inter alia, the ways in which evidence is to be elicited, what evidence is to be admissible before the appropriate national court, or the principles governing that court’s assessment of the probative value of the evidence adduced before it.‘
‘(T)he issue of determining the criteria for ascertaining whether the applicant has in fact proven that the act can be challenged falls within the procedural autonomy of the relevant Member State, regard being had to the principles of effectiveness and equivalence.’ (at 44)
The Court therefore once again bumps into the limits of autonomous interpretation. How ad hoc, concrete (as opposed to ‘in the abstract’: see the CJEU’s words, above) the defendant has to be in providing proof (and foreign expert testimony with it), may differ greatly in the various Member States. Watch this space for more judicial review of Article 13.
Postscript 7 December 2015: Bob Wessels has annotated the case here.